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21 February, 2018
The Reserve Bank of India (RBI) has issued a notification dated February 12, 2018 (“Rules”) setting out a revised framework governing the resolution process for stressed assets.
The Rules set out a comprehensive mechanism for banks to follow in monitoring, reporting and resolving stressed assets. It reduces the ambiguity of multiple stressed asset schemes which existed prior to the Rules therefore, leaving less scope for either lenders or promoters to delay the resolution of stressed assets.
Keys highlights are as follows:
Timeline for Reporting & Resolution: The Rules require that lenders shall identify incipient stress in loan accounts, immediately on default, by classifying stressed assets as special mention accounts (SMA) and report them to the RBI’s large credit database (CRILC). If the principal or interest payment or any other amount wholly or partly overdue between one to 30 days, an account would be SMA-0, for 31-60 days SMA-1, and for 61-90 days, SMA-2 would be the categorization.
Upon the occurrence of a default in payment of dues under the loan agreements, the respective lender is required to initiate the resolution process and complete the same within 180 days from the date of the default.
Referral for Insolvency: If the resolution plan is not completed within 180 days from the date of the default then the lender must file an application under the Insolvency and Bankruptcy Code, 26 (“IBC”), within 15 days from the expiry of the 180-day time-period.
For large accounts where a resolution plan is being implemented, the account should not be in default at any point during the specified period (i.e. a period from the date of implementation upto the date on which at least 20% of the outstanding principal and interest sanctioned as part of the restructuring is repaid), failing which the lender must file an application under IBC, within 15 days from the date of the default.
For accounts with exposure of INR 100 crore to INR 2,000 crore a timeline for resolution will be announced by the RBI separately.
Resolution Plan / Process: In cases of change in ownership, the new promoter shall have to hold at 26 per cent of the share capital of the borrow, be the single largest shareholder of the borrower and be in “control” of the borrower.
Mandatory appointment of credit rating agencies approved by the RBI for rating the residual debt, which will ensure fair and transparent risk assessment.
While, the Rules do not expressly stipulate a joint lenders’ mechanism for resolution, a resolution process is deemed to be completed only when the borrower is not in default with any of its other lenders and documentation between all lenders and the borrower and changes in ownership and security structure is completed.
Exemptions and frauds/willful defaulters: Restructuring of infrastructure projects involving deferment of the commencement of commercial operations date shall continue to be governed by the extant master circular dated July 1, 2015; and revival of Micro, Small and Medium Industries shall also continue to be governed by the extant circular dated March 17, 2016. Borrowers who have committed frauds/ malfeasance/ willful default will remain ineligible for restructuring.
For more information, please contact:
Sameer Sibal, Partner, Jerome Merchant + Partners
sameer.sibal@jmp.law
